An IRS audit doesn’t always mean you’ve done something wrong. However, understanding the audit process can make a significant difference.
People commonly ask the following questions:
To fully understand international tax audits, one should first grasp the meaning of an “Audit.” An Audit is an official review or examination of your accounts or financial records by an independent body.
A “Tax Audit” is a type of audit by the Internal Revenue Service (IRS) in which they closely review a tax return to verify the accuracy of income, deductions, and taxes reported on it. It is a detailed inspection, especially of any out-of-the-ordinary items listed on the tax return. The idea behind a tax audit is to ensure the accurate reporting of accounting information (Income, Taxes, Gains, Losses, etc.) in accordance with tax laws.
In the international tax context, IRS audits often involve heightened scrutiny in the following areas:
Once selected for an audit, the IRS may request that the taxpayer furnish additional documentation or information to validate items in question on the return. In international tax cases, the IRS commonly requests foreign bank records, corporate governance documents, accounting ledgers, contracts, transfer pricing documentation, and supporting evidence for treaty claims or foreign tax credit positions.
The IRS can request documents or an explanation by mail, in person, or by field visit. Generally, there are three types of tax audits:
First, let’s understand the IRS mail audit procedure.